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Socialism and Inflation Measurement
One of the common complaints about the Consumer Price Index (CPI) is that it doesn’t reflect the way inflation feels to the individual. Much of the reason that is so is the fact that we have built-in cognitive biases; a simple example of this is that we tend to encode price increases as ‘inflation’ while price decreases are recorded as ‘good shopping.’ Accordingly, prices which oscillate get recorded in our brains as ‘inflation’, even if the net movement is not much.
My favorite example of this is gasoline. Ask anyone, any time, if they think gasoline prices are higher or lower than they were (say) four years ago and they will say ‘higher’ about 90% of the time. Right now, for example, we know gasoline is at an incredibly high level – $4.101 was the national average at the end of July. That’s compared to the level four years ago, at the end of July 2022, when it was … $4.212. And wildly higher than it was in 2008, when the July 2008 AAA price was … $3.898. In other words, for the last 14 years gasoline has risen at a compounded average annual rate of 0.36% per year, well below the inflation rate.
Sometimes it’s up, looking back over some fixed period; sometimes down. But over the last decade and a half, gasoline basically hasn’t moved anywhere (and that’s including the fact that gasoline taxes have risen).
But if the Bureau of Labor Statistics were to announce that gasoline was basically unchanged since 2008, some people would lose their minds with screams of conspiracy theory. It’s not, unless the American Automobile Association is in on the conspiracy too.
A more fair critique (but not to the extent that conspiracy theorists would have it) of the CPI is that the index is a creature of a government agency and represents standardized weighting and collection methods that may or may not always fairly represent what a particular consumer faces with respect to price increases. This problem is acute in the United States, where a vast geography and very diverse systems of local rules and regulations can directly affect the national average even if it only directly impacts a constrained region. So, when Mayor Mamdani freezes rents in New York City, it will impact national rent inflation a little even though rents are only frozen for a relatively small number of Americans.[1]
And that leads to the fairest complaint at all: if the government engages in price-fixing, does that magically cause inflation to vanish? Of course not! Although rents may be frozen for some units in New York, costs for landlords continue to rise. You can’t wave a magic wand and make inflation go away, but unfortunately you can wave a magic wand and affect the measurement. I wrote about this last year in “Mamdani’s Effect on the CPI”,[2] which in turn points you to a podcast I did a couple of years ago on price fixing. The bottom line is that fixing prices does not change inflation, but it changes inflation measurement because the inflation gets displaced into poorer quality. Quality is hard to adjust for, and whenever the BLS tried people screech about ‘hedonic adjustment’ even though poorer quality would of course increase inflation by making up for the part that is missed in the price level itself.
Anyway, there aren’t many easy solutions for manipulative mayors.
The salient point in that article on the rent freeze is that landlords’ costs are increasing. Enduring Investments’ methodology for estimating rent inflation is based on estimating landlords’ cost pressures, with the assumption being that the return on investment for a landlord doesn’t drastically change over the years when you average across many markets.
Our model has done an excellent job of not getting sucked into the ‘persistent deflation’ story apparent in various measures of rent changes that focus on apartments that are actually turning over, such as the Apartment List index.
These data aren’t false; they just measure something very particular and that is how much competition there is among landlords to let out vacant units. That doesn’t tell us a lot about what landlords are charging for currently-occupied units – and, more to the point, it can’t be the case that rents fall persistently when landlord costs are rising persistently.
But – it is very important to realize that measurement of inflation is not the same as inflation. This isn’t unique to inflation, of course. The monthly Payrolls number depends on the sample and the response, and it is well known that since it doesn’t capture new businesses or closing businesses it is inherently inaccurate. It’s true of virtually all economic data, in fact: the number is a measurement at a point in time, based on a specific methodology and calculation, and so only suggests the underlying metric being measured. The difference is that a massive notional amount of securities are indexed to the CPI!
The Mamdani effect on rents only amounts to probably 5bps/year on the CPI rate. But if the Socialist wave gains momentum (a hard-left Senate candidate won the Democrat nomination yesterday in Michigan!), we need to be cognizant of two things. First, Socialism has a wonderful record of causing an increase in actual inflation when we include the historically-unblemished record of declining standards of living. (Not only that, but eventually inflation happens anyway. As a reminder of that, note that for the second year in a row Obamacare premiums are going to rise by double digits, surprising absolutely no one who understands economics). But second, Socialist policies would indeed have a tendency to cause measured inflation to decline. You think the Fed is in a pickle now? How about when measured inflation is 1%, but adjusted for quality it’s 6%!
[1] Fortunately, freezing rents in NYC, and so artificially changing the measured inflation in New York, won’t result in freezing Owners’ Equivalent Rent in the same area. Although OER is based off the primary rent survey, the BLS recognizes that rent-controlled units are not market rents and so using those in the sample for OER would be misleading. One does wonder how the BLS will calculate OER for New York if Mamdani freezes all rents.
[2] Note one error in that article is that I assumed OER would also be affected. As noted above, it won’t be.
Mamdani’s Effect on the CPI
Surprising no one, and yet shocking many, avowed socialist Zohran Mamdani won the election yesterday to become Mayor of the largest city in the United States.[1]
Probably the main reason for Mamdani’s victory is that he pursued the tried-and-true method of giving out free stuff, and a whole generation of Americans who have systematically been poorly educated in history and economics said “that sounds awesome.” So, now we will see whether socialism will work for the first time ever.
This is an inflation blog, so I want to review briefly the effects of price controls on inflation – and indirectly, on inflation instruments. It’s interesting because we actually have some direct and recent experience with what were effectively price controls: the Biden Administration’s ‘eviction moratorium’ during COVID, that prevented landlords from tossing out renters who weren’t paying their rent. Really, it’s a pretty amazing thing that says a lot about Americans that the vast majority of renters continued to pay rent anyway.[2] An ancillary effect, though, was that landlords had no leverage to raise rents and therefore, rents stopped going up. Unsurprisingly (and here is where the lesson should have been learned), when the eviction moratorium was lifted rents re-accelerated. In the chart below, note how in 2021 effective rents declined while asking rents went up – but the red line eventually rebounded and exceeded the prior trend.
I actually haven’t looked at that chart in a little while. It’s fascinating to me that ‘asking rents’ (which come from the Census department) have maintained their divergence from ‘effective rents’ (sourced from Reis Inc). I wonder if some of that is the effect of the LA wildfires. In any case, not today’s article. The point is that the effective price controls on rents did have an effect on measured rents, but it didn’t change the economics and eventually prices caught up.
Back in 2022, I produced an excellent podcast episode entitled Ep. 37: Bad Idea of the Year – Wage and Price Controls. In it, I discussed some of the trial balloons that had been floated by the Administration and some of the really bad economics that was being used to support the idea. This is a part of the transcript (from Turboscribe.ai), and I still love the analogy:
“But the basics of how it works are very simple to visualize. Price is a teeter-totter, okay? It’s a seesaw. On one side of the seesaw sits all of the buyers. On the other side sits all of the sellers. If there are lots more buyers jumping onto one side, then the teeter-totter drops on that side, and the fulcrum, in order to make everything balance, the fulcrum has to move. And if you move the fulcrum, then you can get that to balance even with more buyers and fewer sellers.
It just means that the fulcrum, which is price, has to move in one direction. If then people, those buyers drop off, then the fulcrum moves back the other direction. If more sellers jump onto the teeter-totter, the fulcrum moves the other direction as well.
So it’s a simple way to visualize it…and yes, there are all kinds of complexities in the real world. There’s behavioral, there’s stickiness that happens, but that’s the fundamental theory of price, is what I’ve just given you, is that price is the fulcrum that balances the buyers and sellers.
So what price controls say is that, well, we don’t like where this balanced. We have too many buyers, not enough sellers, and the fulcrum has moved way over to one side and we don’t think it should be there. So we’re going to take the fulcrum and we’re going to move it to where we like it. And guess what happens? There’s no balance. All of a sudden, if you move the fulcrum away, then all of a sudden, the side with all the buyers goes down and goes thunk on the ground. There’s no balance.
“How do you then balance it? If you say that the fulcrum has to be in this location, how do you balance the teeter-totter? Well, you have to take buyers away. And you take buyers away by making a shortage. And so those buyers can’t buy anything. And then voila. So if you force the price, then the quantity has to change. And if you let both things happen, then it will magically go and balance. If it’s truly a free market and there’s good information and all that stuff.
“So does this solve the problem to push the fulcrum to one side and say, oh, there’s no inflation and to make it balanced, we shove everybody off the teeter-totter by creating a shortage? It doesn’t solve the problem. And furthermore, the people that you’ve pushed off the teeter-totter who can’t get access to the thing anymore are pretty upset. They should be upset because before they had a way to get what they wanted and what they were willing to pay for. And now they can’t because you’ve shoved them off the teeter-totter. You’ve created a shortage.”
That was a public service announcement, just to remind you why price controls don’t work. That doesn’t mean they aren’t really good politics, especially if you can leave the removal of the controls to the next guy who ‘causes’ the inflation when they come off. And it’s the politics, not the economics, that leads to this dumb idea being tried over and over despite a roughly 0% record of success.[3]
Because can price controls affect price indices? You betcha. If you make it illegal to move prices, then at least official prices will not move. So let’s consider the potential impact of Mamdani freezing rents and grocery prices, for example.
New York City is about 7% of the CPI sample. Technically, it’s New York-Newark-Jersey City but we know most of that is NYC. In the New York consumption basket, Rent of Primary Residence is about 11%, 28% is Owners’ Equivalent Rent, and 8% is Food at Home. So, if rents and grocery prices were frozen, about 19% of the NY CPI would go to zero month/month right away (at least officially – the best tomatoes will be sold on the black market for a premium of course and the best catch of the day will be sold in NJ…[4]) And since OER is based on a survey of primary rents, eventually 47% or so of the NY CPI basket will go to zero price change. I’m ignoring the quality adjustments in the housing stock, which have the effect of increasing OER inflation slightly.[5]
The effect of this on the national CPI: if 47% of the NY basket goes from, say, 4% inflation to 0%, and NY is 7% of the national CPI, then the really-rough effect on the US CPI would be 47% x -4% x 7% = -13bps per year. Obviously that’s extremely rough, but I’m just aiming for an order of magnitude calculation. 13bps is small, but noticeable. Probably not tradeable.
But here is something that’s interesting and potentially tradeable. New York City is about 30% of the Case-Shiller 10-City Home Price Index. Let’s suppose that home prices in New York over the next year drop, say, 10%.[6] That move would cause the nationwide Case-Shiller (10-city) index to drop 3%, or to rise 3% less than it otherwise would. Here’s what is interesting. The chart below shows the February 2027 NYC Metro Case-Shiller futures contract, which trades on the CME (and settles to the index for December 2026, which is released in February 2027).
There has been exactly zero price effect of the Mamdani victory. To be sure, open interest in the NYC contract – in all of the Case-Shiller contracts, for that matter – is extremely low but there is an active market-maker and the current price as I write this is 344.40 bid/351.60 offer. The last print of the S&P Cotality Case-Shiller New York Home Price NSA Index, for August 2025, was 334.08. On the bid side, then, the market is paying 3.1% higher prices than the current index. That seems sporty to me. Why would home prices rise if rents are frozen? Why would they rise if people are leaving the city?
As always, my musings here are not trade recommendations; do your own research. Disclosure: I do not currently have a position either long or short in any housing futures contract, nor does any account or fund that I or Enduring Investments manages, nor do I currently have plans to initiate any position.
[1] New York, at least for now.
[2] At the time, we worried about what would happen with the CPI since a renter paying zero rent is not skipped but the rent goes into the calculation as a zero. So you could in theory have had 10% of the basket going to zero, which would have destroyed the inflation market.
[3] If you listen to the episode: I also love my thermometer analogy.
[4] Also, though rents will stop rising the quality of the apartments will deteriorate since landlords will skimp on maintenance. Mamdani has a plan for that, though – he has said the city will order maintenance to be done and if it isn’t, the city will seize the property. Just in case there was any question who really owns any property that you can’t pick up and transport elsewhere.
[5] N.b. – the increase in the CPI nationally from the owned-housing quality adjustment almost exactly cancels the decrease from quality/hedonic adjustments in other parts of the CPI. Yet another reason that the whining about hedonic adjustment being used to ‘manipulate CPI lower’ makes no sense.
[6] You can easily make a case for a much steeper drop if the city increases property taxes to make up for declining income tax collections, not to mention if the exodus from the city looks anything like the 9% of the population who claim they’d move if Mamdani won, or if the finance industry continues to relocate to Dallas and Miami.
